Why You Should Treat Your Marketing Budget Like a Poker Bankroll
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Just as the richest players in poker can still lose it all, even brands with the biggest marketing budgets can still lose millions on a bad play.
Pepsi discovered that truth firsthand after running a tone-deaf YouTube ad in April featuring people marching down a city street with generic protest signs. Kendall Jenner suddenly joined in, then stepped out of the crowd to make a stone-faced police officer smile by handing him a can of Pepsi. This left some viewers wondering whether the ad might be a belated (and expensive) April Fools' Day joke. Harsher criticism led Pepsi to pull it the very next day.
The viral outrage hurt the company's potential revenue and damaged Pepsi's brand sentiment, especially on social media. Industry experts estimate the cost of production, Jenner's fee and the media buy might have run into the hundreds of millions. Although such a huge, global brand could afford to take the hit, it should never have taken such a risk in the first place.
When a small ad can become a big story within hours, every bet is a big bet. Poker players avoid losing too much at once by calculating risks and managing their bankroll. That means a player with $2 million in the bank isn’t sitting down at a table with $2 million in chips, and then going all-in on a bad hand.
Your business should play by the same rules. In marketing, as in poker, disciplined bankroll management and calculated risks are the keys to staying on budget while seizing opportunities that provide high return on investment.
Staying in the game
A great poker player who puts himself in situations he should win 90 percent of the time could still lose 100 times in a row. It’s not guaranteed, but the longer a person plays, the more likely an abnormally long streak of bad luck will occur.
Not every marketing campaign or investment will bear fruit, and sometimes multiple endeavors in a row fall flat. Companies that bet too much on these investments will struggle to survive; those that budget to outlast unlucky streaks will stay on track.
The best approach is to ride the ebb and flow between optimizing for expected ROI and maintaining a position of safety. When limited opportunities start paying immediate dividends, companies that practice bankroll management can double down -- while others lack the funds to capitalize on the opportunity.
Betting on the best hands
Marketing budgets are typically created in vacuums with their numbers based on static assumptions and long lists of hypotheticals. If poker players bet on “what ifs” the way most marketers do, they would go broke within a month.
Smart companies look at past performance data and create fluid budgets that leave wiggle room for unexpected turns of events. By leaving some money behind for the best opportunities, marketers can react quicker to recent data and adjust spending based on real-time information.
At Ladder, we budget according to the 80/20 rule. Eighty percent of our marketing budget goes to proven winners, such as our B2B ad campaigns and Facebook lead ad campaigns. The other 20 percent always goes to a new channel, creative construct, audience or copy test. We see opportunities all the time, so rather than spend all our budget on potential big wins (or all on past successes), we spend small amounts to test. When the risk doesn’t pay off, no harm done. When the investment shows promise, we try to scale it.
How to win big without going broke
The 80/20 rule helps us, but it’s not the only way for companies to practice good bankroll management. Just as the best poker players continually adjust their styles, marketers can follow a few basic steps to maximize ROI and weather down periods.
1. Hold enough cash to ante up.
Always hold back enough budget to continue along a successful path and invest more when necessary. We set a target budget each month and never contribute the entire budget to a single campaign because we have learned that big wins can come from small spends.
According to research recently published in the Harvard Business Review, as challenging as it is to evaluate new ideas, running many inexpensive tests at once is the key. Authors Ron Kohavi and Stefan Thomke explored the outcome of a simple A/B test conducted at Microsoft, for example, to see how changing ad headlines in its Bing search engine would affect revenue.
This initiative had been languishing on the back burner until one eager engineer suddenly decided to spearhead a few, cheap online experiments to test a few different possibilities. Incredibly, just hours later, analysis showed that a single variation in one headline had resulted in a 12 percent increase in revenue -- in the United States alone, that would amount to more than $100 million annually.
As this story shows, even small marketing plays can turn into massive wins. According to the results of "The CMO Survey" from August 2017, marketing budgets now account for around 11 percent of the average company's total budget, no matter the size of the company.
With so much at stake, founders must pick their battles wisely.
2. Keep testing and investing.
"The CMO Survey" also discovered companies of all sizes, across all industries, that rely most heavily on analytics in decision-making typically have marketing budgets 70 percent larger than the competition. Are those companies analyzing data to make sounder bets seeing more success, and therefore bigger budgets?
If an analytics department isn't within your reach, you can still pour a percentage of your resources into new opportunities that demonstrate promise. Limited tests of small investments can provide powerful information.
Our Facebook lead ads might be part of our 80 percent “proven winners” budget today, but for three months, we used our 20 percent exploration budget to test different formats and creative approaches. Once we realized we could replicate the results, we shifted our budget to invest regularly in Facebook ads and began using that 20 percent to test other options.
3. Create a fluid budget.
Keep marketing plans and finances fluid from month to month. New opportunities appear all the time, but they disappear just as quickly. Build wiggle room into the budget to avoid betting too much on a single strategy.
We always double down on what works -- such as our Facebook lead ads. Those big wins from small spends are only possible when we build fluid budgets that can accommodate new ideas on a moment’s notice. Just as a poker player wants to have cash on hand when wealthy, inexperienced opponents sit down at the table, marketers need to be ready to adjust their priorities when golden opportunities arise.
The battle between Snapchat and Instagram proves how quickly marketing channels can shift. Instagram users woke up one day to find Instagram Stories -- almost a carbon copy of Snapchat’s functionality -- on their feeds. Although Snapchat beat Instagram to the punch, Instagram's Stories feature quickly overtook its rival, currently boasting more than 300 million users, according to TechCrunch.
Poker players and marketers alike strive to not win big once, but to develop a replicable strategy that will lead to more sustainable, scalable successes. Heed these lessons from savvy poker pros to practice perfect bankroll management and be ready when it’s time to go all-in.